B. Field of the Invention
The present invention relates to an improved system and mechanism for implementing an employee stock ownership plan involving a commercial entity, while, at the same time, substantially reducing the operating costs of that same commercial entity. The mechanism of the present invention includes apparatus, methods, and data structures pertaining to data processing with digital electrical computer adapted to carry out the accounting, modeling, financial computing and communications related thereto. In particular, the present invention provides an improved employee stock ownership plan, while, at the same time, providing a funding process for a commercial entity having ongoing commodity requirements.
C. Known Prior Art
An employee stock ownership plan (ESOP) as defined by the Employee Retirement Income Security Act (ERISA) is a stock bonus plan or a combination stock bonus and money purchase plan designed to invest primarily in the employer's equity securities. Employee stock ownership plans provide advantages both to commercial entities and to their employees. one advantage to the employees is that they acquire an equity ownership interest in the company. An advantage to the commercial entity is the ability to obtain equity financing from internal sources.
An employee stock ownership plan may desire to purchase a large amount of securities from a key shareholder or, perhaps, from the corporation itself. Typically, the employee stock ownership plan has insufficient assets to pay for these purchases, so it must borrow funds from an institutional lender. This type of concept traditionally constitutes the basis for “leveraged” employee stock ownership plan transactions.
In recent years, the use of employee stock ownership plans has declined and been criticized, primarily due to exploitation through excessive debt leveraging and other abuses. The practice of buying a company, taking on debt and encumbering the employee stock ownership plan with highly leveraged tax-advantaged debt was regularly practiced.
Congressional efforts have attempted to reduce this perceived misuse of employee stock ownership plans. For instance, recent changes to ERISA require that, for tax-advantaged sales to an employee stock ownership plan, an entity must hold stock for three years prior to any sale to an employee stock ownership plan. Further, immediately following the sale of any stock to a plan, the employee stock ownership plan must now own at least thirty percent (30%) of the company, and the proceeds from the sale of stock must be reinvested in a qualifying U.S. security within fifteen (15) months. Additionally, an employee stock ownership plan must own at least fifty percent (50%) plus one (1) share of the stock in a company in order to engage in tax-advantaged borrowing.
As a result, the use of employee stock ownership plans has diminished because the employee stock ownership plan must have controlling interest in the company in order to borrow on a tax-advantaged basis. Also, new restrictions on the use of borrowed funds now exist. Further, there are now restrictions on the amount of pre-tax profits that can be paid into an employee stock ownership plan.